Priced For Collapse

Where is the gold price today? If you're like many Americans, you have no
idea whether it went up, down, or sideways. Fortunately, I know my readers
to be more informed - you likely know that after falling from almost $1900,
gold has been trapped around $1600 since early May. But you may still be curious
why despite continued money-printing and abysmal US economic reports, gold
hasn't been able to hit new highs.

Here's the truth: gold is currently priced for collapse. Many investors believe
the yellow metal has topped out and are selling into every rally.

Nerves of Tin

Being a gold investor is tough business. The last thing any government or
corrupt big bank wants is to have a bunch of people putting their savings into
hard assets - and gold is one of the hardest of all. So we're constantly up
against tides of propaganda saying that gold has no value or is the refuge
of doomsayers.

The effect of this is that even heavy gold investors are always waiting for
the other shoe to drop. When house prices were rising, no one was worried that
the market had peaked or prices were unsustainable. No one was asking whether
all the thin-walled McMansions going up would actually be worth anything in
a generation. But for gold, Wall Street has been shorting it all the way up!

Nowhere is this pessimism more evident that in gold mining stocks. Rising
inflation has driven production costs higher, but the mistaken belief that
inflation is contained and Treasuries are a safer haven is keeping a lid on
gold prices. As such, many of the major producers have missed their earnings
projections, and their share prices have been punished. This has placed a cloud
over the entire sector. In fact, the P/E ratios of major gold miners are near
record lows. Stock prices reflect future earning expectations, and judging
by the low P/Es, Wall Street expects future earnings to plummet. This likely
reflects their bearish outlook for gold, which is generally viewed as a bubble
about to pop.

Chronic Memory Loss

Unfortunately, there is no public validation for those who have proved the
gold doubters wrong. A couple of years ago, I predicted gold would cross $1500
and even my own staff thought the call was too risky, too extreme. But I knew
then, as I know now, that at the end of the day the gold price is not a mystery
- it's a proxy for dollar weakness.

Since most investors do not truly understand gold's economic role, they assume
the 10-year bull market must be a mania. But manias show parabolic growth detached
from any fundamental driver. The definition of a mania is the bidding up of
an asset quickly and beyond all long-term justification.

Gold, however, has grown steadily in inverse correlation with real interest
rates, as explained by Jeff Clark and Mark Motive in past issues of this
newsletter. As a reminder, here's a chart detailing the correlation:

The Opportunity of the Decade

After spending the previous fall and winter testing new nominal highs above
$1800, future investors may come to view spring and summer 2012 as the opportunity
of the decade. Gold has shown its strength and retreated. While most investors
will take that as a signal that the market has topped, some will take advantage
of the general trepidation to add to their positions at hundreds of dollars
off the highs.

While I think gold is a bargain at $1900 considering today's circumstances,
the market phobia of a price collapse is allowing us to buy at well under established
highs. It's as if you already wanted to go swimming, but you found out when
you got there that the pool was heated.

What Happens Next

I've seen markets like this before, and by making some reasonable inferences,
I have a good picture of how this could play out. Gold will continue testing
the $1600 barrier until it surprises to the upside. This could be spurred by
the announcement of QE III, a calming of fears in Europe, or any shock to the
Treasury market. Treasuries have temporarily overtaken gold as the primary
safe-haven asset. Once that dynamic is broken, I believe the counterflow into
gold will be tremendous.

Right now, there is a haze over investors. Frightful news from Europe and
a slowdown in Asia have shaken confidence in any asset that doesn't have the
steady track record of US debt. But as I often remind my clients, past performance
doesn't guarantee future results. Any news that wakes investors up to the coming
collapse of the Treasury market will likely trigger a rush into the one asset
with a track record as long as civilization itself.

Prepare For Collapse

The key to this market is to understand that a price collapse is coming -
but not for gold. Instead, the market for US dollars and dollar-denominated
debt is headed off a cliff, which will send the price of precious metals soaring.

Now is a time for uncommon confidence. Everyone knows Treasuries to be safe,
just as they knew house prices would always rise. Then as now, gold's value
and utility are doubted. But my readers know better.

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Peter Schiff is an economist and investment advisor specializing in the foreign
equity, currency, and gold markets. He became internationally known by successfully
forecasting the collapse of the dot-com bubble, the US housing market bubble,
and the bankruptcy of major global banks. Schiff is Chairman of gold bullion
dealer SchiffGold and CEO of stock
brokerage firm Euro Pacific Capital. He
frequently delivers lectures at major economic and investment conferences,
and is quoted often in the print media, including the Wall Street Journal,
New York Times, LA Times, Barron's, BusinessWeek, Time and Fortune. His broadcast
credits include regular guest appearances on CNBC, Fox Business, CNN, MSNBC,
and Fox News Channel, as well as hosting his own weekly radio show, The
Peter Schiff Show. He is also the author of several bestselling books,
including "Crash Proof: How to Profit from the Coming Economic Collapse" released
in 2007 before the financial crisis struck, and the more recent "How An Economy
Grows And Why It Crashes" and "The Real Crash: America's Coming Bankruptcy."